Craig-Hallum starts Novadaq at buy

Craig-Hallum Capital Group has initiated coverage of Novadaq Tecnologies (NASDAQ:NVDQ; TSX:NDQ) with a “buy” rating and $14 price target. The shares are changing hands at $10.77 on Friday afternoon.

“Novadaq’s current valuation reflects some credit for its atypical attributes and growth opportunities but we believe that as SPY imaging becomes a new standard of care in a very large domain, investors will be able to quickly visualize a much higher market value for a $250+ million top line entity with mid-20% operating margins,” writes analyst Stephen Crowley.

More than 65 peer-reviewed publications support the use of Novadaq’s unique SPY imaging technology, which puts critical real-time tissue perfusion and blood flow information in the hands of surgeons during surgery. This improves their clinical judgments and according to studies by CMS and others, dramatically reduces by 50% to 65% complications, failure rates, hospital readmissions and therefore, costs.

“We believe this puts Novadaq in an exquisite position at the forefront of a fundamental shift within the health care system as providers increase their emphasis on quality, while simultaneously attempting to minimize the extraordinary costs of complications and readmissions,” Mr. Crowley said.

With hospitals losing reimbursement for these costs, the economics of using SPY imaging technology are substantial and readily apparent, he added.

“Having proven the value proposition, the company is now expanding from early-target markets into a broader arena of complex surgeries, where we believe this technology is on its way to becoming standard of care, with an addressable market opportunity north of $1.5-billion in annual consumables revenue in addition to over $200-million in potential system sales,” Mr. Crowley said.

Novadaq also is building a direct sales force to address a multitude of new applications for its systems within laparoscopic procedures.

“With gross margins near 60% and two important new products, PINPOINT and LUNATM, expected to gain traction during 2013 plus a smartly growing installed base of already established platforms, SPY Elite & FIREFLY driving an increasing flow of consumables revenue, Mr. Crowley said Novadaq is “on the cusp of another significant phase of value creation for shareholders as sales, profits and market cap are likely to get very large, very quickly.”